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Magazine Article Not a Penalty Defense

The Tax Court upheld penalties against a corporation that ignored its
CPA’s advice against claiming bonus depreciation on a used airplane.
The corporation instead had relied on a magazine article anticipating
a possible law change that would have permitted the deduction.
Congress, however, failed to pass the provision.

On March 9, 2002, the Job Creation and Worker Assistance Act of 2002
was enacted, allowing an additional 30% depreciation deduction (bonus
depreciation) on the purchase of certain qualified property.
Requirements for qualified property under IRC § 168 included that “the
original use of the property commenced with the taxpayer” after Sept.
10, 2001.

On April 24, 2002, January Transport Inc. (JTI) purchased a used
Cessna Citation to use in its trucking company. Later that year, JTI’s
president told its accountant he wanted to claim a deduction for bonus
depreciation for 2002 on the purchase of the aircraft. The accountant
said she believed bonus depreciation could be claimed only with
respect to new (original-use) property. The president, however,
presented her with a two-page article written by a CPA, titled “30%
Immediate Bonus Depreciation for New and Used Aircraft Approved by
House Ways and Means Committee.” The article was subtitled
“Anticipated Passage into Law Within Two Weeks” and was dated Oct. 14, 2001.

Despite her earlier expressed doubts, however, the accountant agreed
to incorporate the bonus depreciation deduction into JTI’s financial
statements and ultimately into its tax return for 2002. The law,
however, was never adopted for used aircraft, and upon an audit by the
IRS, the corporation conceded that it was not entitled to the
deduction. The Service adjusted JTI’s tax liability and assessed a 20%
accuracy-related understatement penalty in spite of JTI’s reliance on
the article to justify its tax position.

Section 6662 authorizes the penalty on underpayments attributable to
negligence or to the disregard of rules and regulations. Under Treas.
Reg. § 1.6662-3(b)(1) and (2), the term “negligence” generally
includes any failure to make a reasonable attempt to comply with the
tax laws, and the term “disregard” includes any careless, reckless or
intentional disregard of the law. The regulations further specify that
a disregard of rules or regulations is careless if the taxpayer does
not exercise reasonable diligence to determine the correctness of a
return position. A disregard is reckless if the taxpayer makes little
or no effort to determine whether a rule or regulation exists.

The courts have allowed taxpayers who rely upon erroneous advice of
a tax professional to avoid the section 6662 penalty. Although this is
not an absolute defense, the taxpayer claiming this protection must
prove by a preponderance of evidence that (1) the adviser was a
competent professional, (2) the taxpayer provided necessary and
accurate information to the adviser and (3) the taxpayer relied in
good faith on the adviser’s judgment. Reliance on a return preparer is
not considered reasonable, however, where even a cursory review of the
return would reveal inaccurate information (see Pratt v.
Commissioner, TC Memo 2002-279).

While the court in the case at hand accepted the accountant as a
competent tax professional, it refused to believe that JTI reasonably
relied in good faith on the accountant’s judgment regarding the
deduction for bonus depreciation. In fact, the taxpayer ignored the
accountant’s initial warning that the property must be newly acquired
and instead went ahead with a blind reliance on a single news article
discussing a “possible” law change, the court said. Because the
article was written in late 2001, the law was enacted without the
relevant provision in March 2002, and the return was filed in
June 2003, the court opined that the taxpayer did not act as a prudent
person would have by questioning the status of the law at the time the
return was filed. In essence, the court surmised, JTI officials chose
to play the “audit lottery” and use the article as justification.
Accordingly, the penalty was sustained.